What You Need to Know Before Refinancing Your Home Loan

So you’ve paid a few years’ worth of your home loan. You’re happy about your home purchase and now living what only used to be your dream, which was to own your own house. But then, you hear about home refinancing. When does it make sense, and why should you consider refinancing your home?

Refinancing your mortgage allows you to shave a good percentage off your mortgage rate. You can either use this to eliminate your private mortgage insurance or shorten your loan term and save money from the interest fees. But before you look for a mortgage company in Utah that can help you refinance your home loan, you need to know the following first:

You need a good credit score and DTI ratio to refinance

Like any other home loan, there are requirements that you need to meet before you can refinance your mortgage. You may not need a stellar credit score to get approved, but most lenders require their borrowers to have at least a credit score of 760. As for your debt-to-income ratio, having 43% and below is a good number.

You need enough equity to qualify

Mortgage lenders typically require homeowners to have at least 20% in home equity to qualify for home refinancing. But if you go for a conventional lender, they may approve your application even with home equity of less than 20%. But take note that it is always a good idea to have at least 20% so that you can easily get approved for refinancing your mortgage.

Refinancing has many costs

How much it takes you to refinance your mortgage will depend on different factors. These include your lender, your credit score, the interest rate, as well as the loan amount. It is important to know the different fees associated when refinancinng your mortgage so that you can better prepare and check if refinancing makes sense.

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A prepayment penalty can stop you from refinancing

Does your current mortgage have prepenalty payment clauses? If yes, then refinancing your mortgage may not be the best idea. The purpose of a prepayment penalty is to safeguard the loan against refinancing during the first five years. If you choose to pursue, you may end up changing to a new and better loan, but you need to pay a required prepayment penalty before you’re off the hook.

Homeowners have other reasons for refinancing

There is a type of mortgage refinancing called cash-out refinancing. This allows you to tap into your home equity and use the funds you have acquired to finance whatever endeavor you deem fit. Some use this to consolidate their debts. Others make use of the funds to fund home improvement projects, for education, or as a way to start a business. By tapping into your home equity, you’re using your home as collateral. It is best to ensure that you can keep up with your mortgage payment so that you won’t risk losing your home in the process.

When trying to figure out if refinancing is for you, check if your DTI ratio, credit score, and home equity are enough to qualify for refinancing. Double-check if your original lender has imposed prepayment penalty on your current loan. Also, consider your reason for refinancing and weigh the risks and benefits before applying.

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